Transcription
Travel write-offs are one of the easiest deductions to lose in an IRS audit, even when it is a legal deduction. And if you're writing off travel the way people online tell you to, adding one meeting to a vacation, filming a little content, calling it a board meeting with your family, you're increasing your audit risk without even realizing it. Because business travel is one of the most abused deductions in the entire tax code. Congress knew that and it's why they built an entire code section focused on it. And the advice people give about it is usually made up and flies in the face of what the law actually requires.
So, in this video, I'll break down the requirements for deducting travel, why most trips don't survive an audit, and how to structure yours so it does. And I'm Jasmine Duchi. I'm a practicing tax attorney, CPA, and enrolled agent. I got my first tax license as an enrolled agent back in high school. And travel deductions are one of those areas where people confidently repeat advice that completely falls apart the second you look at the actual statute regulations and court cases.
And by the end of this video, you'll understand three things. Okay, the setup, what has to be true before travel is even on the table as a deduction, the reality, why trips that feel business related still fail under the law and IRS scrutiny, and the strategy. Okay, how to set up your travel to be within the law and make it through an IRS audit.
So, let's start with the setup because this is where most people already lose. Okay? You cannot deduct business travel unless you actually have a business. And for tax purposes, having an LLC does not automatically mean you have a business. Okay? Under the tax law, you generally have a business only if the activity is considerable, continuous, and regular. And you're doing it with a real profit motive. And that profit motive is not based on what you say. It is based on what your behavior shows. The IRS and the courts look at things like how much time are you putting into the activity? Are you making changes when it loses money? Do you even have experience in the field you are working in? And are you trying to make it profitable or are you just keeping it around for personal reasons? Because if you don't have a real business under the law, you don't have deductible business travel, that conversation ends there.
But even if you do have a real business, that still doesn't make the trip deductible. The next requirement is that the travel has to be ordinary necessary under section 162A. And more importantly, the regulations tell us that it has to be primarily for business purposes. And this is where people get it completely wrong. Primarily for business does not mean you went on vacation and answered emails or you filmed content while you were there or you scheduled one board meeting during the trip. The legal question is not whether business activity happened. The legal question is was the trip in substance a business trip. Was the location itself actually required for the business activity? And that is usually where the problems begin.
So now that you understand the setup, let's get into the reality, okay? How the IRS and courts actually evaluate these trips because this is not about what you call the trip. It is about what actually happens on the trip. Courts generally focus on three things because the regulations tell them to focus on these three things. First, how much time you spent on business versus personal activities. Second, how significant the business activity actually was compared to the personal activities. Was it directly tied to your operations or revenue, or was it something vague that could have been done anywhere, especially somewhere less expensive and more convenient? And third, how strong the personal side was of the trip? Was it incidental or was the trip filled with things like sightseeing, leisure, and personal events?
And this is where we get great examples from real court cases. Okay. Inhabib versus commissioner, the taxpayer spent two weeks lecturing at the University of Cairo, the court emphasized that he devoted substantial time and effort in preparation and that his lectures helped maintain his professional reputation. Even though he also spent time with family, the court still found the trip had a primary business purpose. But in cases like Clark v. Commissioner and Holles v. Commissioner, the deductions were denied. In both cases, the taxpayers spent 14 to 28 hours on continuing education related to their fields. And in Hleswade, the trip was even sponsored by the American Medical Association. But the courts found that the trips were primarily personal because the education wasn't closely enough related to their businesses and a significant portion of the trips were spent sightseeing, right? Equivalent to or exceeding the time spent on the business activities.
So this is the disconnect. Most people think if something on the trip is business related, it qualifies. But the law asks was the primary purpose of the trip business based on the time spent and the relative importance of the business versus personal activities and was the location ordinary necessary for the business activity itself and that is a much higher standard.
So now let's get into the strategy. Okay, what you need to do to make sure your business travel is illegally deductible and survives an IRS audit. Okay, start with a real business. Okay, something active, continuous, and clearly profit motivated, not just an LLC or a hobby. And then build the trip so that business remains the primary purpose, okay, from start to finish. You can't tack some business onto a personal trip or let personal activities completely take over what originally would have been a business trip because that gives the IRS a great position to remove your deduction. And you just want to make sure that the location itself is ordinary and necessary for your business activity. If you get these three pillars right, you've built the foundation for a trip that can survive IRS scrutiny.
But even then, there are three traps that can still kill the deduction that you want to avoid. Trap number one. Okay, documentation under section 274D. Travel has strict substantiation requirements. Okay, you don't just need receipts. You need records showing the amount, the time and place, the business purpose, and the business relationship involved. And those records need to exist at or near the time of the trip, not months later, not reconstructed after the fact. Because here's the problem. Section 274D does not allow the Cohen rule. If your records aren't complete, the IRS can deny the entire deduction, even if it's otherwise obvious that the trip happened and qualified as a business deduction. Okay, that is one of the fastest ways that this gets denied.
Trap number two. Okay. Family travel under section 274M3, bringing your spouse or kids has a high threshold to deduct. Okay. They are required to be a real W2 employee. Their presence serves a real business purpose at the location itself and the expense would otherwise be deductible and meet all other travel requirements. This rule is intended to get down to the substance. Okay? Everyone likes to vacation with their family. So, Congress came in and said, "We're going to have extra requirements for family members." So, putting your spouse on paper with a title or saying they like helped out is not enough. And we know this from a ton of cases like Mormon v. Commissioner. The court denied a deduction for a spouse who acted as a bookkeeper, notetaker, and entertainer, ruling her work was merely helpful, not necessary. We also have other cases. Sheldon, Benster Maker, and Johnson reached the same conclusion. Socializing or limited administrative tasks don't qualify and simply adding a spouse to a board of directors isn't enough. The IRS and courts care about what they actually did on the trip and whether it was truly ordinary and necessary for the business.
Trap number three, international travel. Okay, you going to Montana for a work trip is not the same as you going to Bora Bora. Okay, they have different legal requirements. Why? Because Congress knows almost everyone would rather work from Bora Bora. This is exactly why Congress enacted IRC274C, which can limit your deduction for foreign travel, even if the trip is primarily for business, okay? Unless you meet one of two narrow exceptions. First, that the trip lasts no more than 7 days. Or second, less than 25% of your total time abroad is spent on personal activities. And then Congress also added IRC 274H, which means you also have to justify why the business activity needed to happen in that specific foreign location. It is not enough to just say, I had a business meeting. You need to be able to show that the meeting reasonably required being held there and could not have reasonably been held in the United States. So if everyone involved is based in the United States and the same meeting could have happened here, that becomes a much bigger problem for international travel than it would have been for domestic travel.
So here's the reality. Travel is not deductible just because you have an LLC. It's not deductible because you worked a little while you were out there. And it's definitely not deductible because someone online told you it was. To deduct business travel, you need a real business, a trip that is primarily business in substance with clean documentation and in compliance with stricter rules around family and international travel. Because the difference between a real deduction and an audit issue is whether your facts actually hold up under scrutiny. And most don't. And if you want more tax advice that actually survives an IRS audit, subscribe.